When the Federal Government spends more money than is available from current revenues (taxes), it finances that overrun by selling treasuries (bonds, bills, and notes), thus incurring debt. As has been pointed out however, the answer to the question as to how much debt is too much is elusive due to the nature of the way the government is financed. In theory, the public sector is the only segment of the economy where it is safe, even beneficial to run a deficit. This is because the government possesses something that no other sector of the economy posses: the power of “full fiscal recapture”. In other words, the power of taxation.
When an individual like you or I, a business, or even to some extent a state or local government incurs debt, this represents an actual liability; wealth must be transferred to a distinct and separate entity, over which the borrower has no control, to satisfy the debt. If this transfer cannot be made, the borrower will go bankrupt.
The government is in a much different position. Most of the bondholders (banks, institutions, or citizens) to whom it owes its debt belong to the same community as that from where it extracts its revenue (with the exception of foreign debt, that’s where the real rub lies). Thus, the government does not have to transfer wealth to a separate entity to pay its debt. Instead, it transfers funds from members of the national community over which it has legal power (taxpayers) to other members of the same community to whom it owes money (bondholders). On a national level, this internal debt is no more than a redistribution of claims among members of the same community, which actually serves the beneficial purpose of stimulating economic activity (even the salaries of lazy government workers eventually work their way back into the economy).
The question of how much debt is too much is difficult to quantify. It is possible that if all bondholders suddenly redeemed their claims there would be a run for cash on the treasury, but even this would be (in theory) not a problem. We’ve all heard the cliché that we are mortgaging our grandkids future. However, those future generations are also the inheritors of those same interest-bearing (revenue generating) securities. Since those same bondholders would be giving up future revenues to their portfolios, we would simply be exchanging one type of cash flow for another (increased revenues in the future for cash-in-hand and higher taxes now).
As noted before, the chink in this chain comes from those government securities bought by foreigners. Those debts do represent a real transfer of wealth outside of our national boundaries and thus are TRUE liabilities. The question as to how much here is too much is also hard to answer. Since US currency (as are most modern economies) is no longer on the gold standard, our money is backed by the “good faith and taxing power” of the US government. As long as the Fereners believe that you and I are able to keep paying our taxes and Uncle Sam will continue collecting them, they will continue to lend us money. In theory we could go on indefinitely until the entire country is mortgaged to the hilt (like leasing a car, only on a national, perpetual basis). At some point though, I believe they will lose confidence on an ever increasingly burdened US taxpayer. At which point the “Party is Over”!
